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This is quite a week in terms of big economic events. We have central bank rate setting meetings from, in chronological order, the Reserve Bank of Australia (RBA), Bank of Japan (BOJ), US Federal Reserve and Bank of England (BoE). For the sake of completeness, the European Central Bank (ECB) met on 20th October and its next monetary policy meeting is scheduled for 8th December. Rounding off the week we have the latest update on US Non-Farm Payrolls - one of the key data releases which the Fed considers in setting monetary policy.

But despite all the meetings, it looks most unlikely that there will be any change in monetary policy from anyone. For starters, there is absolutely no reason for the Fed to surprise the markets with a rate hike ahead of next week’s Presidential Election. The US central bank has held back so far this year so why risk disrupting the markets at such a sensitive time, even assuming the conditions are in place for a hike?

As far as Japan is concerned, back in September the BOJ performed some fine-tuning to its monetary policy by announcing that it had a target yield of zero for the 10-year Japanese government bond. In this way it would attempt to control the yield curve. Then at the beginning of last week BOJ Governor Kuroda said he saw no need to dial down the annual 80 trillion yen of bond purchases. He added that purchases could be reduced in future, but that is a decision for another day - and, by implication, not for this week. Meanwhile, last week’s pick-up in Australian CPI suggests that the RBA will be on hold this week too. Bear in mind, Australia’s central bank cut rates earlier this summer. Finally, last week’s better-than-expected UK GDP number, along with the deep, protracted sell-off in sterling and comments made by BoE Governor Mark Carney suggest that the Bank’s MPC will not be following through on its threat from back in the summer to cut rates further. While it’s fair to say that there’s a long way to go before we can fully assess the economic effects of Brexit, it’s also fair to say that the Bank overplayed its hand when warning of the immediate negative consequences of a “leave” vote. It looks as if the 25 basis point rate cut in August along with the resumption of QE was pre-emptive and had more to do with the Bank saving face than considering the reality of the economic situation. It could be argued that loosening monetary policy to such a degree has not only contributed to (if not caused) the chronic weakness in sterling, but will also make it impossible to respond effectively to a future recession - something we are already overdue - Brexit or no Brexit.

Overshadowing all this is next week’s US Presidential Election. Both candidates have run on a platform of higher fiscal stimulus. Both have made it clear that they want to boost spending on infrastructure. Hillary Clinton also plans tax increases which should go some way to cover the costs, while Donald Trump wants to cut and simplify taxes. Inflation goes up under both scenarios, which should mean interest rates are set to go higher.

Now we’ve got used to the Fed talking up rate hikes ahead of meetings then failing to follow through. This time could be different. The election will be out of the way, data concerning employment and inflation suggests that the Fed at or close to its targets as far as its dual mandate is concerned and most importantly, the market is ready for it. Add in the prospect of an inflationary boost due to government spending, and even tax cuts, and then a 25 basis point hike appears to be a no-brainer. Even the outlook for US economic growth is improving. At the end of last week third quarter GDP came in at 2.9% annualised. This was sharply higher than the +1.4% reading from the second quarter. But more importantly, it was well above the 2.5% expected. Disappointing GDP growth has been a feature of this year, so a turnaround here could be just what the Fed needs to help justify its December hike.

We’re now entering the busiest week for corporate earnings with well over 900 US companies set to report results. So far the season has been mixed. There have been some notable beats to expectations amongst the financial sector with Citigroup, JP Morgan, PNC Financial, Wells Fargo and Goldman Sachs all posting better-than-expected earnings and revenues. Then Microsoft hit all-time high after the company reported earnings per share of $0.76 on revenues of $22.33 billion. This was significantly better than the $0.68 and 421.71 billion consensus expectation.

But we’ve had some disappointments as well. Last week Apple, the largest global corporation by market capitalisation, fell sharply following the release of its fourth quarter results. The company reported earnings per share of $1.67 which was a touch above the $1.66 expected. However, it posted revenues of $46.9 billion which was lower than the $47.0 expected. For comparison, this time last year the company made $1.96 per share on sales of $51.5 billion. This represented its third consecutive quarter of year-on-year revenue declines. But perhaps even more concerning was the fact that Apple registered its first year-on-year decline in sales since 2001.

Other notable reports came from Alphabet (formerly Google) and Amazon. Alphabet rallied after it reported an adjusted quarterly profit of $9.06 per share, smashing through the consensus expectation of $8.63 and also beating revenue expectations. The company also announced a stock buyback of over $7 billion. Meanwhile, shares in Amazon fell sharply despite reporting revenues that came in above forecasts. Earnings came in at $0.52 per share - well below the $0.78 per share expected.

As of Friday morning the S&P500 was on course for a 1.6% loss over the month of October. This is a touch unusual as the first month following the end of a quarter often sees equity markets rally. Out of the 26 quarters going back to the nadir of the financial crisis in March 2009, there have been 19 occasions when the first month of the earnings season has seen the S&P500 rally with monthly declines only happening around 27% of the time. Of course, uncertainty ahead of next month’s US Presidential Election hasn’t helped matters. The S&P also fell in the October before Presidential Elections in 2012, 2008 and 2000, although it did manage to rally in 2004. Unfortunately, there’s no obvious pattern which could give us a clue about how the S&P500 fares in the following month, and this time round much will depend on what investors expect the Fed to do in terms of monetary policy.

Commodity/ FX Outlook

Oil

Towards Friday’s European close, WTI and Brent were both on course to post losses for last week. For WTI this would represent its first losing week since mid-September. The front-month WTI contract rose 22% from its low point on 16th September to its intra-day high on 19th October. Brent was up 18% over a similar time-frame. Given these gains it’s perhaps not surprising that traders would look to book profits. However, oil is a big market for speculators so it usually requires a few decent signals to engineer a change in direction. One of these was the inability of either contract to break convincingly above, and then hold, the highs from early June. These come in at $51.60 and $52.80 for WTI and Brent respectively and continue to act as levels of resistance. Secondly, doubts were raised over the likelihood that members of OPEC will be able to put on a strong show of solidarity when it comes to follow through on the cartel’s commitment to cut production. There was considerable surprise at the end of September when OPEC said that its members had agreed to output cuts in an effort to boost prices. The news saw Brent and WTI push back above $50 per barrel. However, there are still a number of fundamental issues which have yet to be agreed. For a start, it’s still unclear which countries are set to bear the brunt of production cuts or how OPEC will ensure compliance. On top of this it’s still unclear if countries which have already suffered output disruptions, specifically Iran, Nigeria and Libya will be exempted. Not only that, but just over a week ago Iraq’s oil minister said the country should be exempt from production cuts due to its ongoing war with Islamic militants. Another uncertainty is if non-OPEC producers, such as Russia, will also agree to limit production. Earlier last week Venezuela's Oil Minister Eulogio del Pino announced that 12 non-OPEC states had been invited to a technical meeting held by OPEC in Vienna which began on Friday. It is hoped that many of the uncertainties will be thrashed out here and the plans then presented to the full OPEC meeting at the end of November. There were stories floating about earlier in the week that Gulf members of OPEC (including Saudi Arabia) had said they were prepared to cut production by around 4%.

On top of all the OPEC chatter there were also some contradictory US inventory reports. Data from the American Petroleum Institute (API) showed an unexpectedly large rise in inventories of 4.8 million barrels against a forecast of a 1.7 million barrel increase. This led to a sharp sell-off in crude mid-week. However, both contracts recovered quickly following the release of official inventory data from the Energy Information Administration (EIA). In contrast to the API numbers this showed a drawdown in crude stockpiles of 600,000 barrels for the week ending 21st October. The consensus expectation was for a build of around 700,000 barrels. In addition, there was a 2 million barrel decline in gasoline stockpiles, a 3.4 million barrel drawdown in distillates and a decline of 2.1 million barrels in propane/propylene inventories. Total commercial petroleum inventories decreased by 8.7 million barrels last week.

Gold/silver

The consolidation in gold and silver continued for yet another week. It’s now just under a month since the two precious metals slumped just ahead of the open of the US COMEX futures market on Tuesday 4th October. Gold fell 3.5% on the day and sliced through significant support around $1,300. But silver suffered worse losses, falling 5.8% on the day and cracking below its own significant support level of $18.00. The sell-off continued through to the end of that week until buyers crept in at the end of the week and helped to steady the markets. The initial trigger for the sell-off appears to have been a rally in the dollar following the release of better-than-expected ISM surveys and hawkish comments from Fed members. Taken together these helped to increase the likelihood of a rate hike ahead of the year-end. Then rumours that the ECB was considering tapering its bond purchase programme ahead of the official March 2017 end date did further damage. This brought about the possibility of tighter monetary policy coming simultaneously from the US Federal Reserve and the ECB – a prospect which undermined the argument for holding non-yielding precious metals. There was also a story going around that a London hedge fund was forced to liquidate its leveraged precious metals holdings. However, that has yet to be substantiated.

But precious metals bulls will have been encouraged by the recent performance of both gold and silver. The two precious metals have managed to steady and consolidate at lower levels despite continued dollar strength throughout October. Silver appears to be building support around $17.50 which happens to mark the 50% retracement of the rally from December 2015 to July 2016. Meanwhile, gold has managed to bounce off $1,250 which marks the 38.2% Fibonacci Retracement of its own rally between December 2015 and July 2016.

Forex

Perhaps the biggest story in October as far as financial markets were concerned was the big move in dollar. The Dollar Index rose 3.5% over the month and last week briefly broke above 99.00 to hit its highest level since the beginning of February this year. Meanwhile the EURUSD broke below 1.0900 to trade at its lowest level since March. Investors have been rushing into dollars on an increasing likelihood of a rate hike from the US Federal Reserve before the year-end. The chances of a rate rise this week are negligible. The CME’s FedWatch Tool (which uses the fed funds futures contract to measure interest rate expectations) puts the probability of a November rate hike at just 9%. However, the market now assigns a 78% chance to a rate rise at its December meeting. Overall it’s fair to say that investors are preparing themselves for tighter monetary policy from the US Federal Reserve and nowhere is that clearer than in the bond market where yields have risen sharply over the past month. However, there are some investors who still believe that the Fed will chicken out once again when the moment comes to pull the trigger. This is understandable. While unemployment has repeatedly come in below the Fed’s target (thought to be just above 5%), it has proved more difficult to hit the US central bank’s 2% inflation target. In fact, just the other week Fed Chair Janet Yellen seemed to suggest that the Fed may want to see inflation overshoot somewhat before raising rates. However, both presidential candidates have promised increased government spending on infrastructure, while a Trump victory could also bring significant tax cuts. That means that a Clinton presidency would lead to a pick-up in inflation (especially if the Democrats got back control of Congress as well) while a Trump presidency would lead to a surge in inflation. Either way, that suggests rates are going higher, although the Fed may choose to hold off from a December rise on a Trump win should there be excessive market turmoil in the immediate aftermath.

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